Published: Fri, August 03, 2018
Economy | By Shawn Conner

Bank of England raises Bank Rate to 0.75%

Bank of England raises Bank Rate to 0.75%

The decision was unanimous, with the Bank of England's Monetary Policy Committee (MPC) members voting 9-0 to increase interest rates.

At midday on Thursday the Bank of England is expected to raise interest rates for only the second time in a decade.

Reverse repo, the rate at which the RBI borrows money from commercial banks within the country, was adjusted to 6.25 per cent. But the same market on August 1 slipped 85 points even though commentators said the second rate hike was on "expected lines".

"Not for the first time, Mark Carney's policy of guiding the markets as to what to expect has backfired", Ben Brettell, a senior economist at FTSE 100-listed investment manager Hargreaves Lansdown said at the time.

HDFC Bank raised rates for deposits above Rs 50 million to a range of 4.25-7 per cent, effective Thursday.

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Sir Dave Ramsden, one of the Bank's deputy governors, warned savers "never" to expect banks and building societies to fully pass on rate rises.

Investors looking for risk-free, guaranteed returns may continue to invest in PPF, NSC, Sukanya Samriddhi, Post Office Savings, etc. Impact on 10-year G-sec yieldThe maintenance of the neutral stance cooled bond yields after the policy announcement, as the rate hike itself was already priced in.

Where will rates go from here? The increase takes the benchmark rate to its highest level since 2009. If credit demand gathers further steam in the financial year's second half, banks might have to respond with hikes in response to the competition for raising of resources.

Carney reiterated there could be "consequences for monetary policy" if Brexit led to a shock for Britain's economy.

The bank's decision to raise rates comes as global central banks, such as the US Federal Reserve, the Bank of England and the Indonesian central bank also adopt a tightening path.

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In June, three out of nine policymakers, including the Bank's chief economist Andy Haldane, voted for rates to rise to 0.75%.

The majority of mortgage-holders, who have fixed rates, will not see a difference. "Although underlying tone of RBI statement appeared balanced, inflationary risks and outlook highlighted by the central bank indicates hawkishness". The calculation is based on a standard variable rate of 3.99% on a £250,000 20 year mortgage and a tracker rate 2% above the Bank rate. "First inflation is stubbornly above the Bank's 2% target, and secondly wage pressure is adding to future inflation expectations".

Smith goes on to say the BoE may be looking to raise rates faster and further than markets now give it credit for, given its latest forecasts for inflation and economic growth, but that Brexit may prevent it from doing this.

The Scottish Fiscal Commission, which determines the spending envelope for the Scottish Government, has forecast Scotland's GDP growth will stay below 1 per cent for five years.

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